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How Many Swaps Could a Swap Dealer Swap if a Swap Dealer Could Swap Swaps?

February 26, 2012

Photo by johngcramer. Some rights reserved.

We thought we would have at least part of that answer this week. But alas, the ineffable panacea of swap definitions still awaits.

Last September, CFTC Chairman Gary Gensler said that the agency would consider by the end of 2011, rules defining “swap,” “swap dealer,” “security-based swap dealer,” “major swap participant,” “major security-based swap participant,” and “eligible contract participant.” That didn’t happen.

Last week, the CFTC said it would vote on the definitions for who are swap parties, but not on what is a swap, on February 23rd. According to Reuters, the SEC, with whom the CFTC shares oversight of swaps, pulled the proposal during the intervening weekend. See Reuters.

Defining what is a swap and who will be considered a swap dealer and major swap participant has proven to be a more challenging assignment than originally anticipated. Even after the CFTC had announced it would vote this week on definitions, comments were submitted and ex parte communications with staff occurred.

An email sent to the CFTC by Latham & Watkins on February 17th exemplifies how a seemingly straightforward definition becomes an exercise in parentheticals. Latham quotes the CFTC draft as providing that “(iii) the commodity pool is formed and operated by a registered CPO.”

It asks that the language be changed to:

(iii) the commodity pool is operated by a registered CPO (unless subject to an exemption or an exclusion from such registration under the CEA or under CFTC rules) or, by a foreign person performing a similar role or function principally for non-United States persons as defined under the CEA or under CFTC rules and not subject to registration as a CPO.

An 11-word definition has been multiplied to 60 words.

And it’s not just the usual players who have submitted comments. Even the World Bank has felt compelled to weigh-in. At the CFTC’s request, it submitted a legal opinion authored by Sullivan & Cromwell concerning the application of the Dodd-Frank Act to World Bank institutions’ derivatives activities. Not surprisingly, the legal opinion concludes that the application of the Dodd-Frank Act to those activities would constitute a breach of the U.S.’s international treaty obligations.

The European Central Bank has submitted a similar letter.

And even once we know who is a swap dealer, we won’t know what is a swap. No date on when the CFTC or SEC may consider adopting a definition for swap has been publicly announced. Only after the definitions become effective will other rules, such as the CFTC’s swap position limits, go into effect (and even that assumes that the U.S. District Court doesn’t vacate the position limit rules).

So it may be a while before we know how many swaps a swap dealer can swap.

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